Less Than Six Months Until the New Contract Revenue Guidance Goes Live!

The new accounting standards update, Revenue from Contracts with Customers, will officially go into effect in less than six months. For public business entities, certain not-for-profit entities and certain employee benefit plans, the effective date is annual reporting periods beginning after December 15, 2017. Other entities have a one-year reprieve. However, many companies are behind on implementing the new revenue recognition standards because of lack of resources or other challenges. Whether your company is public or private, the changes involve many steps and facets, so the time to begin implementation is now.

Five steps

Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, requires companies following U.S. Generally Accepted Accounting Principles (GAAP) to use a principles-based approach for recognizing revenues from long-term contracts. Under the new guidance, companies must follow five steps when deciding how and when to recognize revenues:

  1. Identify a contract with a customer.
  2. Separate the contract’s commitments.
  3. Determine the transaction price.
  4. Allocate a price to each promise.
  5. Recognize revenue when or as the company transfers the promised good or service to the customer, depending on the type of contract.

In some cases, the new guidance will result in earlier revenue recognition than in current practice. This is because the new standard will require companies to estimate the effects of sales incentives, discounts and warranties.

Changes coming

The new standard goes into effect for public companies next year. Private companies have until December 15, 2018.

The breadth of change that will be experienced from the new standard depends on the industry. Companies that currently follow specific industry-based guidance, such as software, real estate, asset management and wireless carrier companies, will feel the biggest changes. Nearly all companies will be affected by the expanded disclosure requirements.

Some companies that have already started the implementation process have found that it’s more challenging than they initially expected, especially if the company issues comparative statements. Reporting comparative results in accordance with the new standard requires a two-year head start to ensure all of the relevant data is accurately collected.

Reasons for procrastination

Why are so many companies dragging their feet? Reasons may include:

  • Lack of funding or staff
  • Challenges interpreting the standard’s technical requirements
  • Difficulty collecting data

Many companies remain uncertain how to prepare their accounting systems and recordkeeping to accommodate the changes, even though the FASB has issued several amendments to help clarify the guidance. In addition, the AICPA’s FinREC has published industry-specific interpretive guidance to address specific implementation issues related to the revenue recognition standard.

Contact us

The professionals at JLK Rosenberger are well versed in the new standards and can help your company start the implementation process. If you have questions about how the new revenue recognition standard will impact your financial statements and accounting systems, JLK Rosenberger can help. For more information, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.

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